Nexstar Media Group Inc (NXST) 2015 Q2 法說會逐字稿

Good day everyone and welcome to the Nexstar Broadcasting Group's 2015 second-quarter conference call. Today's call is being recorded.

All statements and comments made by Management during this conference, other than statements of historical fact, may be deemed forward-looking statements within the meaning of section 21 of the Securities Act of 1933 and section 21A of the Securities and Exchange Act of 1934. The Company's future financial conditions and results of operations, as well as forward-looking statements are subject to change. The forward-looking statements and comments made during the conference call are made only as of the day of today's conference call.

Management will also be discussing non-GAAP information during this call. In compliance with regulation G, reconciliations of this non-GAAP information to GAAP measurements are included in today's news announcement. The Company does not undertake any obligation to update forward-looking statements reflective of changes in circumstances.

At this time I would like to turn the conference over to your host, Nexstar President and CEO, Perry Sook. Please go ahead.

Thank you, operator, and good morning, everyone.

Thank you very much for joining us on what I'm sure is a very busy day for you all to discuss Nexstar's record second-quarter results which reflect both organic growth and the benefits being realized from our recently completed accretive transactions. As always, Tom Carter, our CFO, is sitting here with me this morning.

Nexstar's consistent operating momentum and financial growth was evident in the second quarter as we delivered another period of record financial results with net revenue, BCF, adjusted EBITDA, and free cash flow again exceeding analyst consensus expectations. Contributions from recently completed acquisitions, organic core advertising growth, distribution in digital media revenue growth, and our focus on managing operations both current cash flow and future growth, all led to record results in all of our key financial cash flow metrics, and we believe have positioned the Company to continue to report record results for the full year of 2015 and beyond.

Our record second-quarter results again demonstrate the value of our long-term growth strategy targeted at operating leading local broadcast and digital media operations in our market, while leveraging scale and extracting anticipated revenue and cost synergies from the accretive platform acquisitions that we've completed over the last few years. With another quarter of strong financial growth we remain confident that significant progress will continue in the second half of the year, and we expect 2015 to mark the company's fourth consecutive year of record free cash flow as we prepare for what we expect to be record levels of political advertising in 2016. This scenario sets up well for us to continue to pursue accretive M&A, to manage leverage, and to continue returning capital to shareholders through dividends that have been increasing on an annual basis since our first dividend was declared in Q1 of 2013.

Looking back at Q2 all of our non-political revenue sources posted year-over-year increases and with our focus on managing operations for current cash flow and future growth, we posted another period of record BCF adjusted EBITDA and free cash flow. The successful integration of our recently acquired station combined with our ongoing strategy to leverage targeted localism content and advertiser relationships drove a 51% rise in net revenue, more than offsetting the $4.8 million year-over-year decline in political advertising.

Excluding political ad revenue our second-quarter gross revenue grew 54% year over year, reflecting core television ad revenue growth, a significant rise in retransmission consent revenues, and continued digital media revenue increases. Overall core revenue growth included a 2% rise in same-station ad spending year over year and increases in four of our top five categories with our automotive ad spend for Q2 essentially flat year over year. In addition our initiatives to bring new advertisers to TV continued to build on our long-term success on this front as new to television ad revenue for Q2 was $8 million. That was a low-key gain over last year's second quarter and it accounted for a 8.5% of our Q2 global revenue.

With the foundation of our success based on an organization-wide commitment to localism in the markets we serve, we are proud that during the quarter Nexstar and Mission Broadcasting were awarded nine regional Edward R. Murrow awards bringing the total number of broadcasting and journalism awards that our stations have won since 2009 to nearly 500. Nexstar's record second-quarter television ad revenue was complicated by a -- complemented I should say by nearly a 100% rise in retransmission fee revenue and a nearly 60% increase in digital media revenue as both revenue sources benefited from both organic growth, as well as our recent accretive acquisitions.

Our distribution revenue growth came from our successful renewal of agreements with over 200 MVPDs in 2014 while our digital net revenue growth was driven by both organic double digit growth in our market and contributions from Lakana, our newly formed digital media service company, and the first full quarter of operations of Yashi, our leading online programmatic video demand platform with location focused technology that we acquired in an accretive acquisition earlier this year. In July we finalized a retransmission consent agreement renewal with one of our top five distribution partners, and we made continued progress in closing that disparity between the value we receive for our content and the viewership levels on the various distribution platforms in our markets.

During the quarter we also extended affiliation agreements for five CBS television stations owned or operated by Nexstar and created a new NBC affiliate in Lafayette, Louisiana and a new MyNetwork TV affiliate in Waco, Texas, both of which successfully launched on July 1. With the creation of these new network affiliates we innovatively reallocated Nexstar's existing spectrum assets and efficiently established two new duopolies without incurring any M&A costs. This will lead to advertising and retransmission consent revenue growth beginning this quarter.

Visibility for our continued near- and long-term distribution revenue growth remains solid, as in late 2014 additional contract renewals represented about 40% of the Company's MVPDs subscribers were completed and another 40% plus of our subscribers are being renewed in 2015, inclusive of the top five partner that we successfully renewed in July. Nexstar's ongoing revenue diversification was evident in the growth in total second quarter retransmission fee and digital media revenue, which rose collectively 89% to $90.9 million and accounted for 41% of our 2015 second quarter net revenue.

That compares to 33% of net revenue in the year-ago period and 26% of net revenue in the last odd year second quarter of 2013. With operating leverage down in the financial statements, our second quarter 2015 BCF and adjusted EBITDA grew 45% and 51% respectively, inclusive of one-time expenses of approximately $1 million related to recent capital market and acquisition activity.

Most significantly, second-quarter 2015 free cash flow grew 65% over the record second quarter levels of 2014 and by approximately 145% over the second quarter of 2013, the previous non-political period, all of which clearly highlights the value being derived from our platform building and revenue diversification strategies. Notably we generated over $93 million in free cash flow year to date, or approximately $3 per share in free cash flow so far.

With accelerating growth in the back half of the year and the full-year benefit in 2016 of the new affiliation agreements and particularly the retransmission renewals combined with our ability to capture large shares of political advertising in our markets, we have excellent visibility toward achieving our free cash flow targets. As such we are on pace to achieve our projected pro forma free cash flow of approximately $456 million during the 2015/2016 cycle, or average pro forma free cash flow of approximate $7.30 per share per year.

Our expanded scale and the very significant free cash flow growth being generated from our existing platform also allows us to complete significant value-building transactions without materially altering our leverage profile. Today's release notes that we have ended the second quarter 2015 with net leverage of about 4.22 times, which is slightly better than the December 31, 2014, level, even as we completed the $275 million 6 1/8% note offering in January to bundle Las Vegas and Phoenix acquisitions, as well as the acquisition of Yashi.

Tom Carter will review our capital structure shortly, but our strengthened balance sheet provides us with a lower cost of capital and additional flexibility allowing us to continue to acquire other stations and digital media assets in accretive transactions, and to delever and to pay dividends with our third $0.19 quarterly dividend to be paid later this month.

For Nexstar and our investors free cash flow continues to be our priority performance metric. I hope that our results this morning and my comments today highlight why we believe we have highly visible prospects to generate nearly a half a billion dollars of free cash flow in this current two-year cycle and the attractiveness of our equity, given this expectation. Now I will turn the call over to Tom for additional financial details. Tom?

Thanks, Perry and good morning, everyone.

I'll start with a review of Nexstar's Q2 income statement and balance sheet data after which I'll provide an update on our capital structure. Net revenue for Q2 of 2015 was $221.3 million, which was a 51% increase over the as reported number over Q2 of 2014. On a same-station basis, which we define as stations owned more than one year, net revenue was up 10.8%.

Core revenue, our local and national spot revenue at our television stations, was $132.8 million, which was 37.6% up on an as reported basis, and as Perry mentioned up 1.8% on a same-station basis. Local revenue was $94 million which was up 33% and was essentially flat on a same-station basis.

National revenue was $38.8 million, up almost 50% on an as-reported basis and up approximately 8% on a same-station basis. Political revenue was $1.9 million for the quarter compared to $6.7 million in 2014, which obviously was a political year.

Retransmission fees were $69.7 million, which was up 99% on an as-reported basis and up almost 50%, 49.8%, on a same-station basis over the previous year. Digital media revenues were $21.2 million, which were up 60% on a reported basis and up 13% on a same-station basis.

All of our profitability measures, broadcast cash flow, adjusted EBITDA, and free cash flow were up between 40% and 60% on an as-reported basis. And the only one that has really comparable, our broadcast cash flow was up almost 8% on a same-station basis.

Second quarter station direct operating expenses net of trade and SG&A expenses rose 68.7% and 32.8% respectively and include approximate $600,000 of transaction expenses related to acquisition and other station activities. The increase reflects higher variable costs related to the higher local and national revenues and the operation of acquired stations and digital assets as we operated or provided stations to approximately 107 stations in Q2 of 2015, compared with 80 in the year-ago period. On a same-station basis fixed cost, excluding affiliation expenses and sales expenses, were up approximately 2% in the quarter as we continue to aggressively manage our controllable expenses.

Nexstar's second-quarter comp and corporate expenses were $10.5 million, slightly less than the forecasted $11 million, of which $7.7 million was cash corporate expense. The $10.5 million included $0.5 million in transaction-related and reorganization expenses surrounding our digital corporate transaction. And so, on a sequential run rate basis we feel like that is almost $1 million underneath where we had expected. This compares to the $9.1 million in total corporate expense a year ago, which included $1.9 million of non-cash stock option expense. For the third quarter of 2015 we project corporate overhead will be approximately $10.5 million, inclusive of stock comp, while cash corporate overhead will be in the range of $8 million.

Turning to the balance sheet, I will review the key items of June 30, 2015. Total leverage was 4.22 times versus the permitted leverage covenant of 6 3/4, and first lien leverage was 1.93 versus the 4 times covenant.

Nexstar's outstanding debt as of June 30, 2015 consisted of first lien debt of approximately $700 million, comprised of $698 million on the term loans and $2 million on the revolver, or a decrease of approximately $34.5 million from March 31 as we pay down $40 million of the revolver borrowings from operating free cash flow, as well as $3.5 million of the term loan borrowings. Absent M&A activity, which we continue to actively to evaluate, our intention is to continue to allocate free cash flow to debt reduction, and with a projection of $456 million of free cash flow between this year and next year it is safe to say we can do a fair amount of both.

The 6 7/8% notes outstanding at quarter end were $525.5 million. The 6 1/8% notes were $275 million in balances as of June 30. Just to also mention we did have approximately $27 million of cash on our balance sheet at quarter end.

Back to Q2, total interest expense was $20.4 million, compared to $15.4 million in the year-ago quarter with the increase related to borrowings to fund platform acquisition over the last year. Similarly, cash interest expense rose to $19.5 million from $14.7 million related to our growth over the year.

Looking at our current capital structure, Nexstar's weighted average cost of borrowings currently stands at approximately 5%. Nexstar's Q2 of CapEx at $5.7 million compared to the year-ago quarter of $5.1 million.

For the full year budgeted CapEx was -- we expect to still remain at approximately $25 million inclusive of the required investment in the new affiliations in Waco and Lafayette. And year to date we've got approximately $11.2 million of that amount.

As it relates to Management's focus on free cash flow generation, our formula remains unchanged in terms of building the top line, maintaining close control of fixed and variable costs, and optimizing the balance sheet. This plan has supported our goals of generating significant free cash flow while allowing us to pursue selective accretive acquisitions, pay dividends, reduce leverage, and take other actions that can enhance shareholder value.

In summary we remain confident that our expectations for the 2015/2016 free cash flow of $456 million, or on average pro forma free cash flow of $7.30 per share per year, and with our operations balance sheet capital structure and cost of capital in great shape we are on plan and look forward to solid returns in 2015 and beyond. Before I turn it back to Perry, I think it is interesting to look at some of the margin data we provided on page 1 of this morning's release.

And you will see that despite comping with an even or a political year, we've moved the adjusted EBITDA margin up in Q2 over 100 basis points versus the previous year's quarter, which reflects the scale benefits we've been calling out, as well as our vigilant watch on expenses. Probably of more interest to you and Perry, our chief free cash flow officer as we call him around here, we are bringing nearly 23% of every revenue dollar to the free cash flow line, which is almost a 200-basis point improvement on a year ago, year over year basis. I hope this illustrates why we're excited about the second half of 2015 and all of 2016 with the return of political and the presidential election, which from all appearances at this juncture is shaping up to be an advertising juggernaut.

That concludes the financial overview for the call and I'll turn it back over to Perry for some closing remarks before Q&A.

Thank you, Tom.

In summary Nexstar's ongoing operation and execution and discipline in managing cost, combined with our selective accretive station transactions, all of which have positioned the Company to achieve record revenue and free cash flow growth, not only in this quarter but for the balance of 2015, 2016, and we believe beyond. Our formula and expectations are well defined and our second-quarter year-to-date results reconfirm again that with GEP light growth for core ad revenue, Nexstar's operating model leveraged to our high-growth revenue sources, including retrans, digital, and political, we can deliver enormous growth and free cash flow. With distribution agreements representing approximately 40% of Nexstar's MVPD subscribers renewed in 2014 and another 85% of our Nexstar subscribers to be repriced and renewed in 2015 and 2016, our continued growth from this revenue source in 2015 and beyond is highly visible.

Similarly digital media revenue growth in 2015 will further benefit from our organic growth remaining in the double digits, as well as our 2014 and 2015 accretive acquisitions. Finally Nexstar is now firmly established in many of the nation's key political markets and our record of extracting high levels of political advertising and issue advertising, we expect that political revenue growth will be a massive contributor in 2016. We have actually started booking some primary dollars for later this year particularly in Iowa.

With expanded broadcast and digital media operations significant and growing free cash flow, a stable capital position, and solid visibility on our 2015 growth, we are confident of our approach to enhancing long-term shareholder value. Importantly as our station platform now reaches approximately 18% of all US television households, there remains considerable opportunity for Nexstar to further expand our platform through additional accretive acquisitions on both the station and digital media side. We remain active and engaged on this front.

At the same time our focus on the capital structure and the cost of capital has positioned Nexstar with the financial flexibility to simultaneously further consolidate mid-sized markets and continue to return capital to shareholders all while remaining a favorable leverage profile, which pro forma for the completion of all announced transactions is expected to result in a total leverage ratio of approximately 3 times at year end 2016. So with all of that said, I'd like to thank you again for joining us this morning.

Let's now open the call to Q&A to address your specific areas of interest. I will turn the call back to the operator.

(Operator Instructions)

John Janedis, Jefferies.

Perry, I'm sure at this point you've seen the headlines from some of the media conglomerates this week. There's obviously pressure in the broader industry in terms of the media stocks. But on a practical level what are the read-throughs to you or to Nexstar from either a shrinking pay TV universe or a rise of skinny bundles?

I think first of all it's important to differentiate that we are not a cable network, and that I believe that we are and will continue to be a part of every skinny bundle evidence to the comments made by Apple and Sony and Sling just over the last week here. We have pretty perfect information on our sub-count as we get paid on those subaccounts every month. And we have seen no material degradation in our sub-counts literally over the past year. I don't believe that the sky is falling.

I like our chances in the skinny bundle, because that means we have fewer competitor on the dial and we will continue to be the most viewed sources of local broadcast television stations in an MVPD household. And that number even would grow with a skinnier bundle because you don't have 500 choices; you may have 50.

I think that the -- we are in a slightly different business than national cable, and I believe that we will be on every skinny bundle package going forward. I'm not sure you can say the same for ESPN or Viacom or Discovery networks. Those would be the choices of the MVPDs.

Maybe a related topic given your mention or reference your Apple. From an opportunity from the OTT players how do they see the value of local news? And is there any kind of benefit for you to allow the networks to negotiate on your behalf in terms of fees?

I think this will all become a moot point if all of these new entrants are classified as MVPDs, which we believe to be likely prior to the end of this year. And then there will be one more distributor for us to talk to.

While we're in this interim period the networks have expressed some interest in taking the wheel and negotiating, but it is still whether they negotiate or we negotiate, if the networks are negotiating on our behalf which we would then have to opt in or opt out to that deal. The networks cannot bind us to any of those deals, and I think we would take the same measure of the value proposition whether we were negotiating it ourselves or the networks.

I don't think there's any benefit to the network negotiating on our behalf, because it still is an individual decision made and again, we have been in touch with both Apple and Sony and had conversations and I'm not even sure it is their preference is to negotiate with the networks. I think they would just like to get something done and in the established process seems to get something done. I think we'll see how it all plays out, but I think they've all been desirous of hearing the local stations as part of any package that they put forth.

Maybe one last quick one. It sounds like the length of your retrans deals are similar, maybe the 2 to 3 year range now on average. But with the rapidly changing environment do you think you reduce risk to Nexstar by shortening or maybe lengthening those deals?

We still believe that shorter is better because the market continues to evolve. In other conversations we have had it is like if you want to add the third year there is a rate for that, and if you are willing to -- I don't think we're leaving anything on the table if we agree on the rate that we're willing to agree to.

So I do not see risk, because we are still so far below the value proposition we bring to the bundle and the value we receive vis-a-vis payments out of the bundle. So I continue to believe, and John I've said this for the last six months or so, that retrans revenue for local broadcast stations is the last great secular play in the media business, and I think it continues on for another half a dozen years at least.

Marci Ryvicker, Wells Fargo.

I may have missed this, so I apologize as I watch the stocks continue to get hammered. But can you talk about your underlying core trends in the second quarter, and how we should think about core local progressed through the year as you comp against political? I would assume that core would continue to accelerate.

The second question is what we've been hearing from the traditional media companies is a consistent theme that their digital is coming in below expectations. You actually have done really well with your e-media, so what are you doing differently to show growth that your peers cannot seem to get?

I'll answer the core revenue. In second quarter if I look on our top 10 categories, which make up approximately 3/4 of our total ad-supported revenue on our television stations, we have five categories that were up. Three of those were up in excess of 20%. We had two categories that were flat which were auto and paid, and then we had three categories that were down; none down more than 8%.

That's pretty much an average quarter, and as I think I reported earlier in my comments our core revenue on a same-station basis was up 2%. We continue to focus on new business development, that's the way we bonus and commission, and new business revenue made up about 8%, 8.5% of our total local revenue for the second quarter.

So I think we continue to be proactive there. As I look toward, third quarter revenue trends, while we don't give guidance, I can tell you that at this point we are projecting 7 of our top 10 categories to be up for the third quarter. And that would be the best report card that we have had in some time.

The quarter isn't over yet, but we have forecasted each of our categories and we project auto to be up, fast food to be up, furniture, paid, attorneys, medical, and then retail to be slightly down, insurance to be up, and the school, paid for education school business will continue to be down. I think we feel that second quarter -- or that third quarter will look a lot like second quarter from a pace of core revenue.

As it relates to digital, all I can tell you is that it is a focus point for the Company. And again, without giving too much away, 25% of a general manager's bonus is tied to hitting his digital revenue budget, which is somewhere in the 5% to 10% of his total revenue. But those things that get compensated tend to get measured and tend to get done.

Tom O'Brien and I were visiting Yashi all day on Tuesday and so I take a particular interest in this. We need to be competitive in a revenue stream that is growing on a macro basis 25% to 30% a year. We need to be deploying resources against that while still depending our GDP growth revenue stream. But more of my time is spent tilted on the digital side and Tom O'Brien's full time is spent on the digital side, in terms of looking for new ideas.

We had all of our regional directors in here for two days last week with a best practices summit. Again it is a local business and we focus all of our resources locally. We're not trying to build a national platform to sell remnant inventory. It is a focus of the Company and everybody understands that from the top down. And again our growth at the local market level was a low-double digit percent and then add our services companies on to that and you get to the kind of growth that we have here.

And I will tell you that every revenue line in our digital revenue line is profitable, has positive EBITDA, and has from day one that is just growing over time. I cannot really speak to what our peers are doing or not doing, but our digital is on, and in fact exceeding our expectations and I think probably exceeding the expectations that everybody has on this call. And we think that will continue and we continue to put muscle and effort and internal resources against it to make sure that is the case.

James Dix, Wedbush Securities.

A couple of questions. First, any updated thoughts on the M&A pipeline?

And then maybe this is related, but thoughts on how the auction might be shaping up for you or people you might be talking to as potential M&A candidates? But also in particular your thoughts, and then I have one follow up.

James, as of this morning we have a handful of active NDAs and we have a couple of active LOIs. And so NDAs don't always turn into LOIs and LOIs do not always turn into purchase agreements, because we're very disciplined on the diligence side, and if it is not accretive we just don't go forward. There is activity going on and we're running our normal process and playbook. And in none of those discussions has spectrum been a gating issue. No one has asked for the quote smuck insurance of -- well I'll tell you the stations that I want a call option on a percentage of your spectrum proceeds.

That's just I think for people in the know that have profitable broadcast television stations. They see that as a low probability and would probably want to sell on the rumor of the auction, rather than news at the auction, particularly if the auction proceeds end up being underwhelming or the auction itself has some problems. All of which are within the range of outcomes. We know what the Greenhill book is for all of our station assets, but I don't think that is anything other than a marketing number.

I think we have said realistically in our Company we could -- our proceeds from the spectrum auction could be anywhere between 0 and $300 million realistically. And I could not assess at this point without more information a higher probability to 0 or $300 million or any number in between. We just do not have enough information at this point.

Obviously we will look at it and if we are able to sell spectrum assets at a premium to what those assets are worth as operating businesses, as good fiduciaries, we would do that if it is a significant premium. If not we will stand pat and keep those mineral rights to ourselves for future opportunity and development. Our position on the auction has not changed.

I think we'd be very -- I take a very sober look at it, but we, again, believe that the best use of our spectrum would be some sort of a recurring revenue model, a leasing model, rather than a one time return of capital liquidation event. And our bias is still toward operating businesses than, rather than selling businesses.

Great, that's very helpful. And then just one thing, in terms of you've laid out some pretty good visibility on the retrans side.

If you could just refresh a recollection on the phasing of your major affiliation renewals? I know you had some with CBS.

I just want to see over the next for 2015, 2016 do you have any material renewals? And related to that would you say that within the period of your two-year guide that, if anything, the net retrans components is looking higher than it might have maybe when you first gave that 2015, 2016 guide? Thanks.

We have at this point no affiliation renewals between now and the end of 2016. We did a little cleanup trade with one of the big four networks where we had some recent acquisitions that were a little off of our timetable.

So we have perfect visibility on the expense side and we think very good visibility on the revenue side, based on a deal we just did with a top five MVPD that quite frankly came in a little bit above where we had even modeled it internally. There are no unknowns on the expense side at this point.

We have 100% visibility on our renewals. And again the way the renewal waterfall is falling, our FOX affiliates are up at the end of 2016, none before then. Our ABC affiliates are up at the end of 2017.

At the end of 2018 is CBS, but then we have these five CBS affiliates that now go through the middle of 2020. And at the end of 2019 will be our NBC affiliates that were done back last year. We're also currently in discussions to renew our CW affiliates on a five-year deal. As you know we don't pay any kind of reverse retrans there. There are some programming fees but they are not significant. And we anticipate getting that done here before the end of the quarter.

Am I to read that your net retrans component if anything is looking even better within the period of your guide, just based, if nothing, on your most recent deal?

We have not updated any of our guidance as it relates to that, but let's just say we're pleased.

Okay, fair enough. Thanks very much.

James, just to put an exclamation point on that we've said before and we will continue to say our net retrans both revenue and margins will increase in 2015 and increase in 2016, and we will still stand behind that statement.

Michael Kupinski, Noble Financial.

Thank you and congratulations on your quarter. I would assume that with growth in service advertising categories that the auto category is less important to the Company over the years. And you indicated that it was kind of flat in the quarter. I was wondering what is auto as a percent of total revenues this year versus last year?

I want to say it is between -- it's right around 24% this year. And it is approximately that or maybe slightly higher in previous years.

Our all-time high contribution from auto as a percent of television ad revenue was 27%. And we're just slightly below 24% as a percent of television ad revenue now.

Got it. And in terms of the auto category in the quarter did you see any disruptions in tier 2 auto co-op advertising on the local level? I understand that some foreign manufacturers appear to have cut back on co-op advertising and I was wondering if you are seeing an impact from dealerships related to that?

I look at our individual dealer spending and it continues to be robust. I think what happened in the second quarter from my perspective is there was some pretty substantial jumps in May and June in the SAR rate.

And as you know the dealers don't get their co-op money until they sell a unit. So, the revenue coming from the selling of those units hasn't caught up with the fact that the units sales were probably above expectation in May and June. So the dollars per car allocated to advertising hadn't developed yet. So that is why I think you would say the SAR grew faster than the auto grew. I think it was for the reason that there was unanticipated growth there.

And we will see how that settles out as we move forward here. Some dealers that I've talked to said business is pretty good right now and I'm not increasing my advertising spending. I'm using some of that excess cash flow to pay for these very expensive showroom remodels that I've had to do over the last couple of years. There could be some of that going on, but we see the automotive category, the SAR approaching its all-time highs in the 17 million unit range. And I think what you will see there is, particularly among some of the Japanese nameplates who have lost share as this growth has occurred due to recalls or product issues, aggressively spend to try and recapture that share.

Again that is speculation on my part, but if history is any guide that would be the behavior that we would see once SAR begins to be a steady state. And then there will also be new model introductions every fall and those tend to drive brand advertising at the top of the purchase funnel.

So the dealerships are trying to capture margin in the very near term but that's probably going to change because it's going to be a lot more competitive. And like you said more models coming to the market that we'll start to see probably late in the third quarter a little acceleration in auto.

If I look at automotive for second quarter, both the automotive ad spend from manufacture and dealer groups was approximately flat. And again that represented two-thirds of our auto category spending.

Our local dealer spending was 44% of our total auto ad category and it was also flat. We did not see a disparity of dealers in a tier 2 versus tier 3 money in the quarter.

And again I for all the reasons you cited I could see those once you've paid off your mortgage you don't have to pay any more on it, so maybe that money will come back into advertising. We are out there with both digital and on-air products to try and capture -- when you go to a local auto dealer, at least in our market, they do not have a budget for digital, newspaper, direct mail. They have one advertising budget per month and you have to make sure you have the best ideas. Because if the radio guy comes in with a better idea there's going to be less money left for you. We encourage our sellers and our sales managers and our general managers stay in front of these auto dealers.

Ideas are the currency and make sure that you are competing with the rest of your market. Because if they buy pens with their names on it that comes out of the ad budget. And we just have to be there with the best ideas every month, and we focus locally on that and the dealer money we compete, that is all agency money from the tier 2 group. We compete for that very aggressively as well, but when we can put our arm around a local dealer and say I have a great idea how to sell 20 pickup trucks by Labor Day if likes the idea we agree on a price and then we go execute for him. And that is the kind of sticky business we would like to maintain.

Dan Kurnos, Benchmark Company.

Not a heck of a lot for me to ask at this point, but maybe you guys can give us a little bit of color if you didn't on the length of the affiliation deal that you just did with CBS? And I know Perry you talked about it briefly in terms of John's question on OTT, but was there any component of OTT embedded in that deal?

The length of our deal with CBS was a multi-year agreement, taking us out into 2020. So, I think you could figure out the length there.

And as to OTT, no, those discussions are still in the very early stages and none of the networks have really addressed that specifically. I should say two of the networks we've had conversations with about certain of these new entrants and two of the networks we have had no conversations with.

It's in various stages of development at every step along the way. We continue to believe though that ultimately these things will be classified as MVPDs and then the protocol will be very clearly established.

Alright, that's a little bit different from what Sinclair, the Sinclair conversation with CBS. But in terms of digital then, Perry, just on the thoughts. Maybe if you could parse out, and maybe I'm asking for too much granularity, the performance between the acquired products and organic growth, and how you think about the differential? And your O&O properties versus maybe third-party marketing assets that you own? And the margin trends within the digital business over time, how you expect them to pace and how rapidly you could expand them?

Tom reported that on a same-station basis our legacy media properties, our digital media revenue was up 13% in the quarter. And then, obviously to get from 13% to 60% the remainder would be the contributions from the acquisitions. Is that responsive to your question?

Sort of. I really wanted to break out more just in terms of organic website growth versus a marketing growth and also margin trends, particularly within both categories as you accelerate growth across your entire digital portfolio.

Again organic website growth is the 13% grower, because that's --

That's what we've owned for more than a year. The recent acquisitions obviously are in the acquired properties which we haven't owned for a year.

Right. And you know every one of the acquired properties had a very de minimis digital presence and that will ramp up, but that will take time. We have to hire sellers and sales managers and train them up.

And so the contribution of revenue, I think I looked at one of our recently acquired stations, their budget for the month was $2,000. We have stations that do $1 million a year in digital revenue that we have owned for a while. But the vast majority of the difference between the 13% and the 60% was from our acquisitions of Yashi and the performance of Lakana that we have rolled together.

As to margins, you look at the services business which Yashi and Lakana are, those are lower margin businesses, but they are fee for service and contracted revenue type businesses that would necessitate a lower margin. Our ad supported revenue at the local market level that comes from digital operates with a margin that is in line if not greater than what we generate on the television stations. Having said that, the local content that we use to seed those websites locally we don't intercompany a charge there. It's part of the operation of the business. Our local margins are in the 40% range and the service company margins are less than that, but not substantially less than that.

(Operator Instructions)

Tracy Young, Evercore.

Just two follow-up questions. On the auto business did you have any exposure to Honda? And what percentage might that have been of your revenues?

Honda for the month was, I'm sorry for the quarter, second quarter was flat for the prior year at approximately $2 billion of revenue, Q2 2015 versus 2014.

Okay. And then your free cash flow guide obviously stayed the same. Are you just, considering that you beat in Q2, are you just trying to be conservative?

It is a two-year guide and 2016 hasn't happened yet. You can take our guide and have your, our beats to it on a quarterly basis if you want.

We're probably not going to do that. We will refresh our guide most likely when we announce an acquisition and contribute that and take other factors in.

But, Tom, I don't know if you want to speak to that. But there is two quarters in and six quarters left to go in that, and given the stock performance this week I'm not sure there's another week we get paid for increasing our guide today anyway.

If you think about free cash flow we have not changed our year, our total year CapEx, even though our CapEx in the second quarter came in light. If we wanted -- I think consensus was roughly $70 million in EBITDA and we came in at $74 million and change.

Am I going to change my free cash flow guidance by $4 million because I beat EBITDA by $4 million in the second quarter? I'm only going to do it when it is meaningful. 1% increase or 2% increase in my free cash flow isn't worth doing that. We're going to do it in more of a stair-step fashion.

Okay, thanks very much.

Typically we would refresh our guidance going into a new year; once we start 2016 we would give 2016, 2017 guidance and you could take from that what you will probably. But -- and again if we announce an acquisition, which we feel that is likely to happen before year end, then I think that is an option to refresh our guide, as well.

Barry Lucas, Gabelli & Company.

Two areas, Tom would you have a reasonable pro forma political for 2012 and 2014 that we could benchmark against and handicap?

I have one, we haven't publicly disclosed that.

Okay. Second area, I think you put the probability or possibility that you would be at 3 times leverage at the end of 2016. All other things being equal, which we know they are not, and the likelihood of Nexstar getting down to 3 times seems fairly slim. So, what would you think is a reasonable leverage to maintain going forward in a rising rate environment, however you want to think about the macro?

I think we've been pretty public about this. In an acquisition environment I think you could expect us to be somewhere in the high 4s to 5 times on a blended basis. In a non-acquisition environment I think it is going to be something less than 4 on a blended basis.

There are no further questions at this time. I'd like to turn the conference back over to our presenters for any additional or closing comments.

Thank you, operator. I appreciate everyone's time and interest, and we look forward to coming back in 90 days to report on our third-quarter results and our perspective on the fourth quarter and into 2016. Thanks again for your time this morning, have a great day.

That does conclude today's conference. Thank you all for your participation.